Q. Consider two countries, Japan also Korea. In 1996, Japan experienced relatively slow output growth (1%) while Korea had relatively robust output growth (6%). Assume the Bank of Japan allowed the money supply to grow by 2% each year while the Bank of Korea chose to maintain relatively high money growth of 12% per year. For the following questions, utilize the simple monetary model (where L is constant). You will find it easiest to treat Korea as the home country also Japan as the overseas country. This question utilizes the general monetary model, in that L is no longer assumed constant also money Demand is inversely related to the nominal interest rate. Consider the same scenario described in the beginning of the previous question. In addition the bank deposits in Japan pay 3% interest; i¥ = 3%.

Calculate the interest rate paid on Korean deposits.